Toys R Us files for liquidation, likely spelling its end in the U.S.

The decision to liquidate the company might not be the final chapter if a buyer surfaces who wants to buy some of the stores and operate them as an ongoing business.

Author:
Joan Verdon and Charisse Jones, The (Bergen County, N.J.) Record and USA TODAY

Published:
5:37 AM CDT March 15, 2018

Updated:
5:37 AM CDT March 15, 2018

Toys R Us, the toy superstore chain that became a dream factory for kids nationwide, said in a U.S Bankruptcy Court filing early Thursday that it must liquidate, a move that will likely lead to the closure of all its stores and sale of remaining merchandise.

The company's main lenders "have determined that the best way to maximize their recoveries is to liquidate the existing inventory in all...735 remaining U.S. stores and begin an orderly wind-down of the U.S. operations."

Toys R Us had initially hoped to be able to keep 400 stores open, according to the court filing, but realized it didn’t have enough cash to preserve that many. “Projected cash burn” according to the motion, was $50 to $100 million a month, without even investing in any of the planned improvements to stores.

“The stark reality is that the Debtors (Toys R Us) are projected to run out of cash in the U.S. in May 2018,” the motion states.

The chain, based in Wayne, N.J., said it has enough money left to pay its 33,000 workers for "no fewer than 60 days."

Sign-up for the #HTown Rush Newsletter

Thank You

Something went wrong.

This email will be delivered to your inbox once a day in the morning.

Thank you for signing up for the #HTownRush Newsletter

Please try again later.

Toys R Us liquidation: Full coverage

It said in the filing that it still hoped that 200 stores in the U.S. could be preserved in combination with its Canadian stores. It said is seeking a buyer for the Canadian operation.

The move came after Toys R Us told employees Wednesday that it is planning to sell or close all of its U.S. stores ahead of a court hearing scheduled for Thursday afternoon. It filed for bankruptcy reorganization late last year, but poor holiday sales and continued heavy debt forced its latest move.

"I am devastated that we have reached this point," CEO Dave Brandon told employees in a conference call, according to a tape of the call reviewed by The Record in Bergen County, N.J.

Brandon said Toys R Us found itself "in serious default on our financing covenants" after a disastrous holiday season. For Christmas 2017, earnings were about half of what the company might expect in a normal year.

The holiday results showed lenders that Toys R Us is "a company that consumes cash" for most of the year, and earns money only during the holidays. When the holiday period under-performed, investors became justifiably nervous, he said.

While U.S. operations are "subject to likely liquidation," Brandon said the Canadian, Central Europe and Asian divisions would be sold. At the court hearing, "There is going to be an invitation sent around the world that all of these assets are available."

If a buyer offers more than the liquidation value, there could be a sale.

Reports that Toys R Us was heading for a complete liquidation of its U.S. operations have been circulating for the past two weeks, with major news outlets citing sources familiar with the negotiations to keep the retailer alive.

In January, Toys R Us announced plans to close up to 182 of its U.S. stores, including 11 in New Jersey. It began going-out-of-business sales at those stores in February.

Brandon said Toys R Us found itself "in serious default on our financing covenants" after a disastrous holiday season. For Christmas 2017, earnings were about half of what the company might expect in a normal year.

The holiday results showed lenders that Toys R Us is "a company that consumes cash" for most of the year, and earns money only during the holidays. When the holiday period under-performed, investors became justifiably nervous, he said.

While U.S. operations are "subject to likely liquidation," Brandon said the Canadian, Central Europe and Asian divisions would be sold. At the court hearing, "There is going to be an invitation sent around the world that all of these assets are available." If a buyer offers more than the liquidation value, there could be a sale.

Toys R Us started as a children’s furniture store founded in 1948 by returning World War II vet Charles Lazarus. Taking advantage of the Baby Boom, Lazarus started opening toy superstores by 1957 as toy hits like Slinkys and Barbie dolls started hitting the market.

The chain's superstore concept triumphed as other chains with smaller stores and less selection fell. Yet Toys R Us finally was facing a foe it couldn't conquer: discounters like Walmart and online shopping dominated by Amazon. The digital era left it with too many stores.

Toys R Us shuttered dozens of stores as it attempted to deal with close to $5 billion in debt that resulted from a leveraged buyout in 2005 by private equity investors Bain Capital and KKR, and real estate trust Vornado.

When the company filed for bankruptcy protection in September, CEO Dave Brandon promised the bankruptcy court, in his opening declaration, that “Toys R Us is here to stay.”

Toy manufacturers and lenders who were owed money by Toys R Us, and landlords who owned store properties, backed nearly every request Toys R Us made as it attempted to reorganize. Toy makers said they needed the retailer to survive because it provided the best year-round showcase for all of their products, unlike retailers that only stock up on toys in November and December and shrink their toy aisles after the holidays.

Toys R Us also attempted to turn itself into a top destination once again, creating play areas where kids could try out toys, and introducing augmented reality to make its products come alive on screens as well as shelves.